27 Pages Posted: 20 Jan 2006
Date Written: January 14, 2006
We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
Keywords: Unemployment, consumption commitments, optimal contracts
JEL Classification: D21, D31, D81, J34
Suggested Citation: Suggested Citation
Postlewaite, Andrew and Samuelson, Larry and Silverman, Dan, Consumption Commitments and Employment Contracts, Second Version (January 14, 2006). PIER Working Paper No. 06-002. Available at SSRN: https://ssrn.com/abstract=877314 or http://dx.doi.org/10.2139/ssrn.877314
By Raj Chetty